Bond mart to witness supply pressure
Since outstanding states' borrowings are more than 40% of government bond markets, a corrective plan of action to discipline state finances, is necessary
Notwithstanding the central government's fiscal deficit consolidation since FY13 (year ending March 2013), a persistent rise in net issuances of bonds has weighed on the fixed income market. This has been primarily driven by deteriorating state's finances which has offset c. 50% of the central government's fiscal consolidation. The central government has reduced its fiscal deficit by c.140 basis points to 3.5% of GDP in FY17, since FY13. However, states fiscal deficit has simultaneously deteriorated to 2.8% of GDP from 2.0% in FY13 (excluding UDAY bond issuances of c.1.5% of GDP over last two years).
Thus, a rapid pace of increase in states' market borrowings (c.20% CAGR) over the past five years has not come as a surprise. States' market borrowings are likely to remain high over the next few years too, as states' fiscal deficits are likely to remain wide (c.3% of GDP) on (i) additional annual interest payment of UDAY bonds issuances (c. 0.15% of GDP) and (ii) upward revision in salaries of government employees as recommendations of the 7th Pay Commission are implemented (aggregate burden of c.1% of GDP is likely to be spread over three-four years). Moreover, the recent announcement by Uttar Pradesh – India's largest state – that it would waive farmers' loans and issue farmer-relief bonds worth Rs 36,400 crore (c.0.2% of GDP), could exacerbate supply pressure in the bond market, especially if other states follow suit.
The writer is head, South Asia Economic Research (India), Standard Chartered Bank, India